Wednesday, June 5, 2013

Primary trend
for stocks continues bullish.

Readers of
this Dow Theory blog know that the Dow Theory can be boring for those looking
for hectic action. Days pass by and trends remain the same.

Well, today
is not one of these dull days. According to the Dow Theory, today we can label
the secondary trend of stocks as bearish. Today, the SPY, Industrials and
Transports closed down. By closing down, the requirements to declare the
existence of a secondary reaction according to Schannep’s Dow Theory “flavor”
have been fulfilled, since:

1.Since
the last recorded closing highs, prices have receded for more than 10 days on
two of the three indices we monitor. The Transports have been going down for 12
trading days, the SPY for 10 days and the Industrials for 6 days.

2.At
least two indices have lost most than 3% from the last recorded closing
highs.

Here you have the percentages lost by each index:

DIA

TRANSPORTS

SPY

closing High

15409.39

6549.16

167.17

closing Low

14960.59

6138.36

161.27

Pct loss from

-2.913%

-6.273%

-3.529%

closing high

Therefore, we
see that both the Transports and the SPY have declined more than 3% in the last
few days.

So today both
the time requirement and the extent requirement have been fulfilled,
and, accordingly, we label all the price action that occurred since the last
recorded highs as a secondary reaction against the primary bullish trend.

How long will
the secondary reaction last? We really don’t know. We know that secondary reactions last
as little as two weeks (in which case, the “new” secondary reaction would be
dead by now) or as long as three months or even more.

We know,
though, that given the nature of the Dow Theory, the secondary reaction should
not:

a)Go
beyond the last recorded primary bear market lows (11/15/2012), which sit at
135.70 (for the SPY) and represent a price 18.79% below today’s prices. A
penetration of such lows would immediately re-qualify the secondary reaction as
a primary bear market swing.

b)Not
even penetrate the -16% level from the last recorded closing highs. This is the
so-called Schannep stoploss. According to Schannep’s research, which is
partially echoed here, a decline
from the top exceeding 16% is not a correction but a new primary bear market.

If we judge
from experience a secondary reaction can perfectly erase between 3 and 15% of
the gains made by the last primary bull market swing. In our case, this primary
swing started on November 15, 2012.

A secondary
reaction is actually good news for the followers of the Dow Theory. Until now,
our stoplosses where placed either at 135.7 (SPY) which corresponds to the
primary bear market lows or at 140.42 (SPY) if we put our stop according to
Schannep (-16% from the top). In either instance, both are too ample, albeit
the only technically correct, stops.

However, the “natural”
stop that provides us the Dow Theory tends to be a narrower one. This narrower
stop is the secondary reaction lows. Once the secondary reaction lows are made,
we wait for a rally off the lows of at least 3%, if the market then reverses
and such secondary reaction lows are violated, we get a primary bear market signal.
Such a primary bear market signal is our “stoploss” or exit point. More about
it in my post Why Dow Theory matters: Outstanding Risk Reward Ratio thanks
to the Dow Theory’s trailing stop”,
which you can find here.

Here you have
an updated chart highlighting the secondary reaction (blue rectangles).

It's official: Seconary reaction in the stock market

Today’s
volume was higher than yesterday’s, which makes it a bearish volume day. The
overall pattern of volume is now bearish.

Gold and
Silver

GLD and SLV
closed up. The primary and secondary trend is bearish.

GDX closed up
and SLV down. The primary and secondary trend is bearish.

About Me

Disclaimer/Disclosure

This blog (dowtheoryinvestment.com) is strictly a personal journal applying my interpretation of Dow Theory principles to the action of the stock market and my musings about investment and trading in general. This blog is intended solely for entertaining, illustrative or informational purposes. I am not a registered investment advisor and neither the information nor the opinions expressed should be construed as a solicitation to buy or sell any stock, option, ETF, mutual fund, currency, commodity, or any other security. I am unaware of any readers personal circumstance, financial condition, risk tolerance or goals and objectives, so nothing read here should be considered advice suitable for them. Anyone reading this blog does so with the understanding that this is strictly meant as an analytical exercise and does not proffer actionable advice in any way, shape or form. Trading and investing always entail risk and possible loss of funds and should only be undertaken after appropriate due diligence by the trader/investor and after consulting a registered investment adviser.